Friday, August 31, 2012

Typhoon Bolaven changed to a tropical storm and brought high winds and heavy rain to Jilin and Heilongjiang Provinces on August 28 and 29. The path of the storm is shown in the Chinese weather map below.

The storm flattened large areas of the corn crop in the two provinces. A report on the storm's impact on corn quotes farmers in various parts of Jilin and Heilongjiang Provinces who report large areas of corn are completely flattened with no stalks left standing. Farmers' estimates of the impact of the storm on corn production in their areas range from 30 percent to 50 percent. We'll probably never know the true impact since Chinese authorities are on pins and needles worrying about food price inflation and unlikely to admit that the storm will affect the corn harvest.
Some photos of corn fields in Jilin and Heilongjiang Provinces from Chinese news sites:

Thursday, August 30, 2012

A farmer in Henan Province who claims his pigs were killed by a vaccine erected a shrine to his dead animals outside the gates of his farm to publicize his grievance against the vaccine company. The company quickly responded, offering a different side of the story.

According to an article posted online, the farmer administered a vaccine for pseudorabies to over 300 of his pigs on August 1. He claims to have followed the instructions provided with the drugs and the directions of the salesman. Soon after administering the vaccine, many of the sows miscarried and other pigs died. He claims that over 200 sows miscarried, losing 2600 piglets (13 piglets per sow), and 50 others died. He claims the vaccines caused him to lose 1 million yuan.

A regional manager for the vaccine company said they will compensate farmers if there are verified losses due to their vaccine. In this instance, the farmer was not able to get any compensation. The farmer says he called the phone number on the package but no one answered. Another family member says the salesman was not authorized to sell the vaccines. When asked if the vaccine could be tested, the farmer said there is only one lab in the country where such a test could be done and they don't do testing for individuals.

A farmer's memorial to his dead pigs, made of pipes covered with plastic sheeting.

The farmer built a crude memorial hall similar to those used to honor dead relatives. He covered the three walls with photos of his dead pigs and displayed ear tags of all the deceased with photos attached. The farmer banged his head on the ground until it bled and he was restrained by relatives.

Memorial hall covered with photos of dead pigs.

A black-framed photo in the center memorializes an "innocent" sow with offerings of fruit and displays a vaccine box. The frame proclaims "a vaccine against my disease and against my life." A banner over the entrance reads, "3000 pigs killed by administering [name of company]'s vaccine." A pair of couplets on the sides read, "Despotic [name of vaccine company], 7000-head pig farm destroyed."

A description of the farm says it is the No. 1 fine breed farm in Fengzhuang Town, opened in 1987. It sells 1700 piglets per year, has an inventory of 287 sows, can sell 2000 finishing hogs and claims to make a profit of 700,000 yuan annually.

The company responded to the report with an online announcement that offers another side of the story. According the the company's investigation, the pigs were vaccinated on August 1, showed signs of listlessness the next day, and began miscarrying on August 3. On August 14, a company technician visited the farm and found the pens were dark with little sunlight (a video posted by the farmer is consistent with this description). Pigs were emaciated and had rough skin. Six to eight were asthmatic. The temperature at the farm was extremely hot--40.5 degrees centigrade--and feed was poor in quality.

The technician learned that additional abortions occurred on August 13. Stillborn piglets had yellow fluid around their noses. Blood serum samples from the dead pigs were sent to the provincial academy of agricultural sciences to determine the cause of death.

The company held a meeting on August 7 to look at quality of raw materials, manufacturing process, production records and quality control for its pseudorabies vaccine. They found no problems and tests of the vaccine found no problems either. The company claims to have sold 426,000 doses in 20 provinces with no other problems having been reported.

The company asserts that the pig deaths are not related to its vaccines. The pigs became listless a day after the vaccination and began aborting the second day. The company speculates that the farm may have had a pseudorabies or other other viral infection several days prior to the vaccination. The company says it takes 6 days for the vaccine to effectively protect the animals from infection. The company claims it will follow this matter closely and will try to help the farm address its disease problem to fulfill the company's social responsibility.

It's not surprising that the company's investigation finds no responsibility for the deaths. To the company's credit, the information it provided is more detailed and plausible than what the government provides after incidents like this. The company's quick and detailed response obviously is prompted by the high degree of competition in the vaccine industry. Market competition provides companies with strong incentives to respond to problems and make corrections when problems arise.

Sunday, August 26, 2012

A recent article bemoans the increasing reliance on imported high-end agricultural machinery in China. Like nearly every other industry in China, the farm machinery industry has thousands of tiny manufacturers who churn out low-tech machines and knock-offs of popular products. There is little capability or incentive to engage in research and development. China's push for high-tech methods that maximize production from its limited resource base--like precision agriculture and laser-leveling of fields--relies entirely on imported equipment--what might be called a "John Deere-ization" of agriculture.

According to the article in China Comment, Chinese officials are now placing a high priority on technologies like precision agriculture, automated equipment and GPS that can raise the efficiency of agriculture. This is motivated by China's lack of land and water resources and the urgency of boosting farm output. However, Chinese farm machinery companies cannot produce the high-end equipment needed for this strategy. It has to be imported.

The director of the China Agricultural Mechanization Research Institute told the reporters that China is the second-largest producer of agricultural machinery and has nearly 20,000 companies in the industry, nearly all of them very small. He estimates that the output of the top 1,800 "above scale" companies (i.e., not tiny workshops) is roughly equal to the annual output of the John Deere company. He said only about 200 Chinese agricultural machinery companies have capacity to do their own research and development.

An official of one company complains that Chinese companies don't produce many large tractors. He says the largest tractors produced by Chinese companies are generally in the 90 to 120 hp range while overseas large tractors are often over 500 hp. Of course, a fundamental limiting factor here is that most of China's farmland is fragmented into small plots. There are few large fields--mostly on state farms set up 50 years ago in far-flung regions along the Russian border--that would justify use of a big tractor.

The Chinese equipment is also predominantly low-tech. A Ministry of Agriculture official estimates that 70% of "advanced" equipment for farm use and agricultural processing is imported. The chairman of a Chinese company says he has seen on his trips to the U.S. and Germany that laser-guided leveling of fields is much more accurate and efficient than the manual techniques used in China. He says Chinese companies have researched these technologies but have a hard time reaching the standards of foreign companies.

The Ministry of Agriculture official commented on the technology gap. He says foreign countries use automated fertilization using liquid fertilizer that is about twice as efficient as the 40-percent utilization rate achieved from Chinese practices of manually scattering fertilizer on fields. He notes that corn yields are 10 percent higher from using precision seeding methods.

The director of the machinery research institute complains that most high-end farm machinery is imported. He says competition from imports squeezes the domestic industry. He says "monopolization" [by foreign companies] leaves the industry in the control of other people and leads to high prices that raise farm production costs. His comments reveal an undercurrent of nationalism when he asserts that imports weaken the [Chinese] race's agricultural machinery industry (民族农机产业).

In fact, the industry's weakness and low profits seem to be internally generated, not created by a foreign bogeyman. According to the article, the farm machinery industry has low barriers to entry, so there are thousands of small manufacturers, some making only a few dozen pieces of equipment a year. There are constant price wars that squeeze profit margins. There is little innovation, and most companies make their living by copying popular equipment produced by bigger companies.

The chairman of a big Chinese farm machinery manufacturer complains that a company can spend 5 or 6 years developing a new product which is immediately copied by numerous competitors who sell knock-offs at a low price. He was perturbed when he recently went to a trade show and found 17 companies selling copies of his company's corn harvester.

Few companies have R&D capability. There are few patents granted and even fewer are for core technologies or innovations. One company in Hebei Province offered as an example is a leading producer but its sales are only 50 million yuan (less than $8 million) annually. Its profits are 3 percent of sales. The factory has about 200 workers and a dozen technical personnel. However, the technicians are older workers who have little or no technical education. They spend a few thousand dollars a year on R&D but their capability is minimal. The company pays low salaries and has not hired any college graduates in recent memory.

The farm machinery industry story is remarkably similar to that of other farm input industries like seeds and livestock breeding. As China tries to make a quantum leap from semi-feudal peasant farming to "modern" high-tech agriculture, it is bypassing the time- and money-consuming process of developing technologies suited to its own resources. The low-tech approach is encouraged by the lack of property rights protection which is now coming back to bite China in the behind. China is trying to boost agricultural productivity by importing the basic technologies...breeding animals, seeds, and machines developed for use in North American agriculture, a completely different economic, cultural and ecological environment from China's.

Those who have so much admiration for the "China model" of economic growth should take a closer look at this "take and make" approach.

Chinese government and industry officials call for establishing R&D institutes, offering financing for R&D, companies merging and forming alliances, and raising barriers to entry to the industry to promote innovation. Will these steps work or will the farm machinery remain a short-sighted industry on a constant race to the bottom? The success of such initiatives will determine whether the "China model" can be turned into a sustainable model that can create wealth instead of shifting it around from one place to another.

Monday, August 20, 2012

According to Chinese Grain Bureau statistics, the government has been the dominant buyer of grain so far this summer. This reflects the big increase in support prices this year, an apparent need to restock reserves, and relatively weak domestic demand this year. It recalls 2008-09, during the last economic slowdown when authorities bought large amounts of major crops, and seems to reflect a subtle U-turn from the privatization of grain marketing in 2004.

The major crops harvested in the summer are winter wheat, early-season rice, and rapeseed. State-owned companies have been the dominant purchasers of each of these crops this year.

As of August 15, state-owned companies accounted for 70 percent of wheat purchased. Wheat purchased under the minimum-price program accounted for 45 percent of wheat purchased so far this year. No wheat was purchased at the minimum price in 2011. This year's total purchase of 22.8 mmt is consistent with earlier reports that authorities wanted to replenish wheat reserves that were down by 20 mmt.

State-owned companies have accounted for 66 percent of early-rice purchases so far this year. Total early rice purchases of 5.1 mmt are up about 20 percent from last year at this time. There was a big policy push to increase early rice production this year.

State-owned companies accounted for 68 percent of rapeseed purchases so far. Most of this rapeseed was bought under the support price program. Sinograin buys the rapeseed, processes it into oil and stores it until it can be sold.

The dominant share of state-owned enterprises, however, seems inconsistent with another common narrative: farmers prefer to sell their grain to private traders who come to their fields and villages to buy. Do the traders resell the grain to state-owned enterprises?

In a related trend reflecting the resurgent role of the state in grain marketing, an article from Ordos in Inner Mongolia praises its practice of awarding subsidies on the basis of the volume of grain sold to government reserves. Farmers get 100 yuan for every 1000 kg of grain sold to state-owned enterprises. In a program that sounds a lot like practices from the 1990s and earlier, local authorities set up a "grain leadership group" composed of people from the Grain Bureau, Agricultural Development Bank, Development and Reform Commission and grain enterprises which formulates grain purchase plans and central, provincial and local reserve targets. (Xinjiang Autonomous Region and a number of prefectures in southeastern China have similar subsidies for marketed grain.)

Subsidizing sales of grain is described by the Ordos article as superior to the subsidies based on land-holdings which have turned into an egalitarian benefit for land-"owners" that fails to achieve the original intent of incentivizing grain production. The grain sale subsidy is described as a good implementation of the State's grain policy that other localities should imitate.

This subsidy would have to be reported to WTO as an "amber box" subsidy. The 100-yuan/mt subsidy is less than 5 percent of the gross value of production, below the 8.5-percent ceiling China committed to. However, adding seed and other "amber box" subsidies would get them close to or above the ceiling.

An essay posted on dozens of Chinese blogs this week warns that China's grain imports put the country at risk of being victimized by an American "grain war." Judging by the large number of blogs that posted it, the article apparently resonates with many Chinese people. Similar ideas regularly appear in the Chinese press and government documents. Many outsiders are oblivious to the conspiracy-drenched thinking presented in this article that guides many industry people and policymakers in China.

The essay, written by a journalist named Qiu Lin, asserts that the United States uses grain as a "strategic weapon" to force other countries to do its bidding. The U.S. government, says the writer, works hand-in-hand with "American" multinational grain companies to gain control of grain markets and then uses the threat of grain embargoes to achieve its political objectives.

Qiu Lin claims that "multinational grain companies like ADM, Bunge, and Cargill" are using their control of soybean production, logistics and storage to dominate the Chinese soybean market. He claims these companies "control Chinese farmers' intentions to plant soybeans," are trying to push China to allow planting of genetically modified soybeans, and replicate their control of the South American market in China. He warns that China can't allow the corn industry to follow this pattern.

Mr. Qiu refers to a Japanese magazine article warning that America uses a "grain strategy" to perpetuate its global hegemony. It warns that multinational grain companies have set up worldwide information collection networks that exceed the capabilities of spy agencies. The author cites 10 grain embargoes since 1950, eight by the United States. However, the only specific embargo he mentions is one against North Korea. He claims this example shows that the food weapon is more powerful than an aircraft carrier.

He then plays the subsidy card, claiming that subsidies account for 40 percent of the income of American farmers. Poor Chinese farmers, he says, work hard all year and only earn a third of what they could earn working off-farm. No one wants to plant crops, he says, posing a "hidden danger" to Chinese grain production.

The author warns that China's rising deficit between grain demand and supply will be provided mainly by America. Sooner or later, the United States will launch a "grain war" against China to prevent its economy from overtaking the U.S. economy, says Mr. Qiu.

This type of conspiracy theory thinking appeals to Chinese readers whose literature is filled with characters who win through guile and trickery. Trouble is, his argument is full of holes. He conveniently ignores, for example, that Yihai Kerry--based in Singapore--has by far the biggest share of China's vegetable oil market. The book, Merchants of Grain, emphasizes that the multinational grain companies have no nationality; they are composed of people from many countries and have moved from country to country following political winds and emigration of executives. Has the author ever heard of the "great grain robbery" during the 1970s that embarrassed the United States? Since when has the United States forced North Korea to do anything?

Writing on the failed 1980grain embargo intended to punish the Soviet Union for invading Afghanistan, Robert Paarlberg wrote, "U.S. illusions of its food power have been properly dispelled." Unfortunately, the illusion lives on in the minds of paranoid people all over the world.

Saturday, August 18, 2012

China's rainy wet weather this summer has facilitated an unusually large population of planthoppers in many areas of southern China. These tiny winged insects suck sap out of plants and lay eggs. The resulting "hopper burn" turns rice plants brown and ultimately kills them.

In Hunan Province insect problems with the rice crop are up 30 percent this year and Hunan's planthopper infestation is said to be the worst in 20 years. Hunan officials blame the weather. They organized two massive sprayings of the crop earlier this summer, but effectiveness was limited by ineffective use of pesticides and the lack of labor since so many farmers were away working in cities. Despite these problems, Hunan officials insist their spraying will limit the effects of the bugs.

Big planthopper infestations recur every 5-to-7 years, and Hubei's planthopper infestation this year is said to be the worst since a record outbreak in 2006. Planthoppers are said to have affected 70 percent of the province's rice area this year. In 2006, planthoppers affected 90% of Hubei's area and losses of 1.18 million metric tons were attributed to the bugs.

A reporter visiting Zhijiang saw no visible evidence of planthoppers in the field. However, a technician described the planthoppers as a hidden crisis. He picked a rice plant, shook it, and gray planthoppers fell out. The technician said that 30,000 bugs can turn a rice field brown in a week's time.

Planthoppers were first observed this year in Zhijiang in early May. An adult lays 200 to 400 eggs and produces a new generation in just 20 days. In Zhijiang, farmers plant early, late and single-season rice crops, so the bugs can find suitable fields all summer long.

The Hubei article offers 61-year-old farmer Song as an example for farmers to follow. Song said he broke out in a cold sweat in July when he found 25,000 planthoppers in his field. However, a couple of days after spraying, he says there are few bugs left and now he feels relieved. The technician says they left one field unsprayed and there are now 40,000 planthoppers there.

The Hubei article says city people shouldn't worry that planthoppers will affect rice prices. It says they have treated two-thirds of the single-season rice crop and there shouldn't be much effect on production. According to the article, rice prices are affected by multiple factors: weather, quality, and grain imports; the effect of planthoppers on rice prices is "not clear."

An article by a Zhejiang University Professor (in English) worries that planthopper problems in China are becoming more widespread and lead to estimated losses of 2 or 3 million tonnes annually. He attributes the increase in planthopper problems to increasing pesticide and fertilizer use and the adoption of hybrid rice varieties that are favored by planthoppers. He cites two chemicals--imidacloprid and fiprinol--used to treat seeds which have become "virtually useless" because planthoppers have developed resistance to them.

According to the International Rice Research Institute's (IRRI) fact sheet on planthoppers, an outbreak occurs when pesticides kill natural enemies that would eat their eggs. IRRI recommends avoiding "indiscriminate use of insecticides" to control planthoppers since the chemicals kill natural enemies. An IRRI video warns about the rapid increase in insecticide-resistance in China, warns that pesticide-spraying is counter-productive and explains a method for controlling planthoppers without insecticides.

It's unlikely that Chinese farmers or officials would be receptive to IRRI's integrated pest management method since it requires leaving a strip of vegetation in fields to support bugs that are natural enemies of planthoppers--that would mean fewer rice plants per hectare and a lower rice yield. The preference is to plant rice as densely as possible and depend on chemicals to wipe out any pests that show up. The Pesticide Action Network criticizes China and Vietnam's boost in pesticide funds in response to a big planthopper outbreak in 2005: their fact sheet argues that pesticide use during the 1970s created the planthopper infestation in the first place.

If there is considerable damage to the rice crop, officials probably won't admit it since rice is such a politically sensitive crop and they are so worried about food prices. The Hunan article mentions in passing that the province has a target of increasing early-season rice production by 700,000 metric tons. It is rare for Chinese officials to acknowledge that a target was not attained. Thus, you can bet on another statistical increase in rice production regardless of the weather or pests.

Tuesday, August 14, 2012

Chinese news reports say that large portions of the corn crop in China have been hit by an unusual infestation of army worms, a type of moth caterpillar. According to the reports, the problems have been apparent since early August and are a result of heavy rains in July. The effect on Chinese corn markets is tempered by relatively weak demand.

Farmers say army worms are present each year to some degree. The moisture and high temperatures in late July and August this year have been favorable for corn, but also ideal for army worms.
Reports say that 30 million mu (2 million hectares) have been affected by the pests. This includes 9.9 million mu in Hebei Province, 8 million mu in Inner Mongolia, and 1.8 million mu in Jilin Province. Parts of Liaoning, Heilongjiang, Shandong and Guizhou have also been seriously affected.

corn affected by army worm in northeast China.

The army worm problem will affect the crop to some degree, but the effects are not as serious as a drought. Army worms tend to affect concentrated areas and can be controlled to some extent with pesticides. The estimated 30 million mu affected is less than 6 percent of the estimated 510 million mu of corn planted this year.

The news comes at an unfortunate time since USDA just slashed its estimate of the U.S. corn crop last week by 16.7%. Before the army worm invasion became evident, it appeared that China was going to have a big corn harvest. USDA also raised its estimate of China's corn crop from 195 million metric tons to 200 mmt last week.

According a futures industry news account, the effect of a tighter supply on corn markets is tempered by relatively weak demand in China. Corn starch processors are said to face a theoretical loss of 190 yuan per metric ton at current corn prices of 2400 yuan and starch prices of 3000-3050 yuan/metric ton. Alcohol producers are losing 640 yuan/metric ton. Feed mills' demand for corn has slacked off due to the big decline in hog prices this year.

Tuesday, August 7, 2012

China almost surely has the smallest farms in the world. The average family's land holding is about an acre, and many have less than that. Now Chinese authorities are trying to encourage a shift to "large farms" that are still small by standards in most countries.

Like everything else in China, "large farms" are not easily described or generalized. An article by two agricultural economists in the communist party journal Qiushi explains that "large grain farms" (粮食大户) are farms of at least 100 mu (16.5 acres) in northern provinces and 30 mu (5 acres) in the south. These are what Americans would call "hobby farms," but they are considered the agricultural vanguard in China. The Qiushi article says that large farms are mechanized, integrated with processors, use high quality seeds, and are more profitable than micro farms.

A survey in Hunan Province shows that there are a wide range of sizes. Hunan is reported to have 105,000 farms of at least 30 mu, up from 61,000 in 2008. Hunan has four farms of 10,000 mu (1650 acres) and 767 of 1000 mu (165 acres). Of the five counties surveyed, most of the 1000-mu farms were in one county, but two other counties had large numbers of 30-to-100-mu farms. Large farms appeared first in the northern part of the province and are appearing now in the central and southern parts. They are less common in hilly and mountainous areas of Hunan.

The Hunan article identifies several types of large farms. About 15 percent are individuals who want to operate more than their contracted plots and rent from neighbors. Another 20 percent are farmer cooperatives. 60 percent of large farms are operated by farmers who offer machinery services, due to "needs and policy" (probably the machinery purchase subsidy). Some other large farms are connected with mills or other processing enterprises.

Large farms are diverse operations. One article describes a real estate tycoon who was raised in the countryside and operated a series of businesses before deciding to return to agriculture in a big way at age 50. He acquired 48,000 mu (7900 acres) of marsh land in northern Jiangsu and spent 10 million yuan building a 27-kilometer canal to bring in fresh water to flush the salt out of the soil in 2006. He claims to have gotten rice yields of 500 kg per mu and is hailed as a hero by the local land bureau.

Another article describes a farmer named Cao in Guangdong Province who operates a custom-farming business with his four brothers, father-in-law, his wife's uncle and a hired hand. He has five transplanting machines and charges 35 yuan per mu. They have seven rice harvesters and charge 50 yuan per mu. They transplanted rice on 1500 mu and harvested 5000 mu. Their net income last year was 230,000 yuan (over $35,000). He acts as a sales agent for four machinery companies and collected 32,000 yuan in commissions on 40 sales last year. Mr. Cao has 10 mu of his own land and subcontracts 210 mu of rice paddy from others. He gets grain-planting subsidies of 88 yuan per mu (about $34 per acre). The land "owners" keep the subsidies for 40 mu of the land he farms, but he gets 15,840 yuan (about $2,475) in subsidies for the other 180 mu.

Most of the land is acquired by renting land from other farmers--usually on a short-term basis. According to the Qiushi article, in northern China, about half of the land operated by large farms is the farmer's own contracted land, a fourth is rented short-term, and 11 percent is rented long-term. In the south, farms include about 22 percent of their own contracted land, more than half is rented short-term, and 12 percent is rented long-term.

In Kunshan, a highly urbanized area near Suzhou, a report complains that land rent is the biggest expense for large farms. In this region, a new mechanism is being used to set the market rental rate for farmland and the rent has risen from 250-300 yuan per mu in past years to 700 yuan this year. The report warns that costs are outpacing prices and says that large farms hope the government will limit increases in land rent. It also asks for more subsidies: a price-plus subsidy (a bonus for each kilogram of grain sold) and subsidies for pesticide and machinery services.

A farm operated by a company in Anhui Province complains about lack of financing for large farms. This farm rents 1300 mu (215 acres) and has cash expenses of 5 million yuan ($780,000). The operator applied for a bank loan but has no collateral since rural houses can't be mortgaged. He says loan guarantee companies are expensive. For a 1 million yuan loan you have to pay 7.8 percent plus an assessment fee, so you only get 910,000 yuan.

The Hunan survey reports that about 25 percent of large farms produce for rice mills under contract. At least one rice mill's contract can be used as security for a loan guarantee. One local branch of the Agricultural Bank of China makes loans of 500 yuan per mu to large farms.

The Hunan survey credits large farms for boosting the area planted in rice. It says large farms plant two crops of rice per year while a lot of small-scale farmers have been leaving their land idle at least part of the year. While the survey claims large farms are more apt to use better techniques and disseminate them to other farms, they don't necessarily get higher yields. Average yields reported for 58 farms in the Hunan survey show that the highest yields were obtained by farms with 20-30 mu. The lowest yields were obtained by the smallest and largest farms. Calculations based on the survey data show that large farms of 500-1000 mu also had higher average unit cost, at 1.42 yuan per kg of rice, versus 1.23 yuan for farms of 20-60 mu.

Source: Hunan Province survey data compiled by dimsums blog.

A number of provinces are giving subsidies to large farms since they often don't get subsidies attached to the land and pay high rent. Hunan and Hubei give cash awards and several others give subsidies per mu or awards for renting large contiguous areas of land.

With bigger farms, subsidies are bigger and there is more incentive to lie and cheat. In Zhejiang Province, a farmer was arrested and fined for falsely collecting a bonus meant for large farms. You get 460 yuan for each 1000 kg delivered to government grain depots. This farmer signed a contract to deliver 100 metric tons to the grain bureau, claiming that he planted 300 mu when he only had 2 mu. He bought grain from Anhui Province to fulfill the contract. The contracted sale price was less than what he paid for the grain, but he covered the loss and still made a profit after collecting the 44,849-yuan subsidy bonus. He was arrested for lying about being a big farmer and misusing state subsidies.